Tuesday, November 03, 2009

Bailouts -And Bonuses- Continues In Britain

The U.K. government will step in with an additional £31.2 billion to troubled banks Royal Bank of Scotland and Lloyd's in a sign that the problems for the British banking sector isn't over.

A condition for this extra cash infusion is that no bonuses will be paid out for anyone earning more than £39,000 per year. However, the chief executive of Royal Bank of Scotland says:

"That does mean we will be making extensive use of deferred payments and payments in shares.

We are aware that we need public support, given our position. However, the surest way for the taxpayer to see value for its support is if RBS is able to have very good people and compete in its markets. We must be competitive or we will not return value to the taxpayer."

Translation: we will make exploit loopholes in the no bonus provision so as to make it meaningless in practice, because we believe it is so important to keep the geniuses that were responsible for the losses that made government support necessary.

This illustrates again the problem with using regulations as a substitute for market mechanisms. If the Royal Bank of Scotland hadn't been bailed out, no bonuses would have been paid of course because the company wouldn't be around to pay them. The attempt to achieve the same effect through regulation fails because regulations in this case, as in most other cases, have loopholes.